21% of Canadians Are Making a Huge Mistake With Their Credit Cards

One in five Canadians is making only the minimum payment on a credit card. Here’s why that’s a mistake.

Caution, careful

Image source: Getty Images

One of the biggest mistakes you can make with your credit card is to pay only the monthly minimum.

And, according to the MNP Consumer Debt Index, around 21% of Canadians are doing just that.

Yes, put five Canadians in a room, and one is paying the minimum balance on their credit card. Other “bad financial habits” from the study include borrowing money you can’t afford (11%) and succumbing to deals such as Black Friday (12%).

Why is paying the minimum on your credit card so bad, and what can Canadians do about it? Let’s take a look.

Why you should always pay more than the minimum

The minimum on a credit card is the smallest amount your credit card provider will accept per month. If you pay less than the minimum, your card provider will count it as a missed payment.

But the minimum is just that: a minimum. By paying only the minimum, you carry a balance, which triggers your cards APR. The longer you carry the balance, the more you pay in interest.

Let’s say you charge $6,000 to a credit card with a 20% APR. Your credit card provider gives you a $120 minimum. If you pay just the minimum, it would take you 106 months to pay off the full $6,000. How much interest do you accrue in those 106 months?

$6,603.

You’ll pay more than you charged to the card in interest by making minimum payments alone.

Let that sink in for a moment.

What if you can’t pay more than the minimum?

One out of every five Canadians is struggling to pay the minimum on their credit card, which isn’t a good sign. If that’s you, you do have one solution: get a balance-transfer credit card.

A balance-transfer credit card is a low-interest card designed to receive debt from a card with a high APR. The low interest is usually a promotion, which lasts anywhere from a few months to a year or longer.

The trick is to pay a majority of your credit card debt (or all of it) before the promotional APR period ends. If you do, you could save a tonne of money in interest.

If the promotional period is too short, you can do consecutive balance transfers until you pay off your debt. Of course, balance transfers can come with fees, so you don’t want to perform more than is necessary. But if it means saving money on interest, the fees will be worth the cost.

If you have multiple credit cards, I would try the debt roll-down method. With this strategy, you list your debts from highest to lowest interest rate, pay the minimum on all your debts, then make extra payments toward the debt with the highest rate. Once you pay off the debt with the highest rate, you “roll down” your extra payments to the debt with the second-highest rate. Keep doing this until you’re debt free, and you could save yourself money on interest.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Personal Finance

woman retiree on computer
Investing

Retirees: Here’s How to Boost Your CPP Pension

Retirement planning is best done when considering not only your CPP pension, but also your investments in income-producing stocks like…

Read more »

Female hand holding piggy bank. Save money and financial investment
Personal Finance

Here’s Why a Big Emergency Fund Is a Terrible, Terrible Idea

Here's why saving more than six months' worth of expenses can be disadvantageous to your household.

Read more »

cup of cappuccino with a sad face
Personal Finance

5 Super-Simple Ways to Completely Ruin Your Credit Score

Building your credit score takes time, dedication, and smart decisions. Tearing your credit score apart — well, you could do…

Read more »

Young woman sat at laptop by a window
Personal Finance

5 High-Paying Side Hustles That Could Help You Save for Retirement in 2022

If you're struggling to save for retirement, here are five side gigs that could give your retirement fund a boost.

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Personal Finance

The Tax Deadline Is Almost Here! Here Are 5 Things You Need to Know if You Haven’t Filed Yet

The deadline to file your taxes is May 2. If you haven't started yet, here's what you should know.

Read more »

consider the options
Personal Finance

New to Investing? Be Sure You Avoid These 5 Newbie Mistakes

If you're new to investing, here are five big mistakes you should watch out for.

Read more »

Couple relaxing on a beach in front of a sunset
Personal Finance

Lazy Canadians: Here’s How You Can Make $200 Per Week in Passive Income

To earn $200 a week, invest money in high-quality stocks or ETFs.

Read more »

gas station, convenience store, gas pumps
Personal Finance

Costco vs. Canadian Tire: Which Rewards Card Will Save You More on Gas in 2022?

The CIBC Costco Mastercard earns 3% back at Costco Gas, and the Canadian Tire Mastercard earns 10 cents per litre.…

Read more »